Staying Competitive in Today's Homebuilding Industry.

Staying Competitive in Today’s Homebuilding Industry
Deloitte and McGraw-Hill Construction • U.S. Homebuilder Survey
Homebuilding Industry –
Sustaining the Recent Success
According to data reported by the Bureau of Census and the National Association of Realtors, there are approximately 120 million
homes in the U.S., and about 1.5 million new single-family homes are added to the stock each year.
In 2004, there were 1.6 million single-family homes started (versus 1.2 million sold), and 350,000 multifamily starts. The median price for new
single-family homes reached $221,000 in 2004, compared with $184,000 for existing homes. The average size of a home continues to grow
steadily, reaching a median square footage of 2,162 in 2004, compared with 1,535 in 1975.
Industry’s Significant Factors
The key driver in homebuilding is the
level and direction of interest rates. Other
significant factors that drive cycles within the
industry are supply and demand, pricing, and
the availability of rental units. The market
is also impacted by employment trends,
consumer confidence levels, and housing
prices. The availability of mortgage capital
also plays an important role in sustaining
consumer demand.
Although interest rates and the number
of new housing starts are among the
most visible factors shaping demand, the
structure of the industry itself is the most
salient determinant of economic value.
Indisputably, the homebuilding industry
structure is becoming increasingly attractive.
Fundamental long-term demand for housing
remains strong. Population growth, real
income levels, and the age of households
are among the prominent variables likely to
positively influence the homebuilding industry
over the next few years. Less visible trends
include intensifying barriers to industry entry.
Complexity of development and economies
of scale in capital access and materials
procurement are making it more difficult for
new players to enter the market. The rivalry
among existing competitors is also increasing.
Not only are large builders gaining market
share, they are competing head-to-head in a
growing number of markets.
Land is the Differentiator
Land is the most important commodity in the
homebuilding business. Land is becoming
increasingly scarce, especially in hot markets,
and correspondingly, land is becoming more
important to the buyer than the features of
the new house alone. The result of these
trends is superior profitability in the industry,
especially for large regional and national
builders. Despite strong consumer demand
for housing, the supply of land for home
building is limited. Builders are facing a
critical shortage of developable land. As a
result, the cost of land has soared in many
regions of the country. Builders are locked
in bidding wars. Local governments are
promulgating more and more land use
regulation as they attempt to foster “smart
growth.” Governments are lengthening
the permit approval process, preserving
land for conservation, and minimizing
residential growth by imposing moratoriums
on development. In some markets, threefourths
of home price appreciation growth
can be attributed to land-use regulations,
according to Fisher Center for Real Estate
and Urban Economics Chairman Kenneth
Rosen. Regulations are limiting the amount of
developable land and increasing the costs of
that land
Industry Consolidation
– Threat or Opportunity?
In addition to limitations on the supply of
land, business growth and the prospect
of consolidation are major issues for
homebuilders. When growth is limited
in currently served markets due to land
restraints or competition, one way to grow is
to expand in new markets, by either seeking
business in a new geographic area or by
taking over another firm in a different region.
For dozens of years now, large public builders
have been devouring smaller private builders
in an effort to sustain pricing power and
increase their supply of buildable land. The
trend toward consolidation shows no sign of
abating any time soon.
The following summarizes the critical issues
using information gathered from our survey
of homebuilders and lot developers, as
well as our continuous monitoring of the
real estate markets.